As a follow up to my last post on how much work you should do before selling your home I’m addressing the question of remodeling. Quite frequently home sellers become aware that their home is missing some key ingredient to facilitate a sale. Often sellers don’t realize they have an issue until they get some brutal feedback from buyers but other times they realize that they have issues before they even put their home on the market. Most commonly it’s outdated appliances, kitchen, or bathrooms. Or it might be a worn out floor that can’t be refinished. And once sellers come to the conclusion that their home needs more extensive work they start wondering if they should simply lower their price or take that same money and use it to renovate their home. In other words, what they are really wondering is if spending money on renovations would be worth more to buyers than an equivalent price reduction. Put another way, they are wondering if spending the money would increase the value of their home by more than the money spent.
Apparently, it’s a very tempting proposition because sellers opt to do these projects all the time. On the surface you can see where these sellers are coming from. They feel like they are being unduly penalized for their home’s deficiencies. And some of them reasonably conclude that buyers don’t want to take on these projects themselves because of the PITAF (pain in the ass factor). But there is actually some hard data available on this very quandry and it argues for doing nothing. Every year Remodeling Magazine produces a Cost vs. Value Report (www.costvsvalue.com) that shows what the return on various remodeling projects is for homeowners and they produce this report for various regions of the country and specific cities. Conveniently, they even have a Cost vs. Value Report for Chicago. What all these reports basically show is that remodeling is a negative return investment across the board – i.e. you lose money doing it. Here are some examples from the Chicago report:
- Small scale kitchen remodeling returns only 72% of the money invested
- Bathroom remodeling returns only 55%
- Basement remodeling returns 55%
- Window replacement returns 61%
Wow! Remodeling is a money machine – in reverse. How can this be? Well, it’s always easy to explain a phenomenon once you know the result and in this case I think it’s a safe bet that what we are seeing here is a discount attributable to the difference in tastes between buyers and sellers (individual differences, not group differences). If a seller remodels a portion of their house it is almost impossible for them to “get it right” as defined by the vast majority of buyers that walk into their house – e.g. the seller puts in a KitchenAid Architect refrigerator but the buyer wants a Sub Zero. Hence, buyers discount the improvements for not matching the choices they would make.
One caveat before I put this topic to rest: I can not say unequivocally that no seller should ever take on any remodeling project. I would think that if there is a part of your home that is a real eyesore then you should do something about it – e.g. you have a really gross bathroom or you have really unsightly water damage. But get a second opinion on these situations before proceeding.